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Interpretation of regulatory tests results
 most companies fail some ratios without being a sign of distress; view as a whole
 ratios are not conclusive evidence of insolvency risk or lack thereof
 MSA ratios are applied to all companies regardless of whether they are federally licensed

Calculating Net Income
 Sum of Underwriting Income and Investment Income
 = Net EP  expenses  net claims incurred + net investment income

Calculating Adjusted Equity
 assets (bonds, debentures, shares, recoverables, receivables)
  liabilities (unpaid L&LAE, UEP, reserves required)
 = GAAP Equity  capital required for catastrophes and unregistered reinsurance
 = Previous year Equity + NI  capital required for cat and unregistered reinsurance

Capital ratio
MCT/BAAT: total capital (assets) available / required capital (margin); min = 150%

Return (UW + Inv) on…
 Equity: shareholder’s return; look for sustainability; min = 5.4%
 Revenue: GWP; income relative to revenue generating capacity min = 6.2%
 Net EP: core earning capacity of insurer; min = 4%
 Assets after Tax: (average); ability to generate income from asset base min = 2.6%

Equity ratios
 Leverage Ratio: (NWP + Net Liabilities) / Equity; max 500%
 Net UW Leverage Ratio: NWP / Equity; max 300%
 Net Loss Reserves to Equity: max = 200%
 OneYear Development to Equity: min = 10%
 Reinsurance Recoverable to Equity: measures dependence on reinsurance
 AOCI to Equity (Accumulated other Comprehensive Income)

Yearbyyear change
NWP / GWP / Equity

Other ratios
 Investment Yield: 2 (NII + OCI) / (Asset_{b} + Asset_{e}  NII  OCI); min 6%
 TwoYear Combined Ratio
 Cash Flow from Operations to NWP: min = 0%
 Liabilities as % of Liquid Assets: max 105%
 Overall Diversification Score: LOB diversification (110) x Geo diversification (110); welldiversified companies score 65 and higher

